My Wealth Building Strategies-Personal Investment Update

My First Real Estate investment:

Four Family Apartment in St. Louis Missouri

I Fell prey in 2005 to the real estate craze with this purchase. Hindsight tells me that I made this purchase as we were cresting the height of the market, so it has been a struggle to turn it into an asset rather than a huge liability. This was in rather poor shape in 2005, it needed serious tuckpointing, had wiring and roofing issues, and just was not very aesthetically pleasing. All this has been completed, along with new windows and complete renovations of 3 of the units. Now this is an asset, at least when it is full and everyone pays on time (this is the biggest struggle.) Rents are $535 each and there are 4 units, bringing in a gross monthly income stream of $2140. My mortgage is $1235. There are many benefits to owning this, but it is not without some downsides. Here are some of the benefits I have enjoyed over the years:

Positive Cash Flow!

The cash flow is great, but as I said, there are some months where chasing down rent are a necessity. There are 2 tenants who pay on time every time. There is one who pays on time roughly 80% of the time and the other, well, I am lucky to get her “full” payment 65% of the time. The issue with her is that she never complains (probably because she doesn’t want any attention to herself .) She is clean, quite and doesn’t cause issue with the other tenants. I figure these qualities are worth something, plus when she does pay, she includes all accumulated late fees as well.

House Price Appreciation

At this point, there is very little appreciation. Most of my price appreciation comes from paying down the mortgage (I am using some of the cashflow to make bigger payments) so at this point, my interest payments which are 3.75% are palatable. The beauty is my tenants are paying my mortgage, yes I have to manage everything, but the payoff will actually come from my tenants, this is wealth building 101!

Tax Benefits of Home Ownership

Depreciation allows me to deduct the cost of my buildings and the substantial improvements I have made to it, over a specified period of time. My building can be depreciated over 27.5 years. This is figured by dividing the cost paid, which was $206,000 in 2005, by 27.5 and then subtracting the resulting sum $7490 from the property’s income each of the 27.5 years. This helps lower my tax burden.

Real Estate Tax Deductions

Throughout the years I have done a considerable amount of renovations and improvements, such as tuckpointing, new roof, improvements to the units, built a retaining wall, etc, etc, etc. These improvements cost me at the time, so I did have to have the cash to pay for them when they happened. The beauty at tax time was, whatever the cost of each improvement was, directly offset my taxable income. For instance, the roof which cost $2000 at the time, allowed me to deduct that amount from my gross income. So, what all the deductions do is essentially lower your gross taxable income. For example, if I made $100,000 and paid a 35% tax rate on that $100,000 my tax would be $35,000. Using my deductions, if I made that same $100,000, but I had $15,000 in real estate deductions, then my gross taxable income is $85,000 which means I paid taxes on this amount of income rather than the $100,000. So as you can see rental properties are a wonderful way to lower your tax burden. At a time when taxes look to be going up, acquiring real estate as a hedge, would be a great investment in my opinion.